More Argentine Bondholders Hitch Their Claims to Holdouts

The bar that the Argentine Republic must reach for a settlement with a holdout bondholder group may become even higher now that a new crop of bondholders wants to piggyback on a judgment bolstering the rights of the dissidents.

At least 102 bondholders who took legal action separately from the holdout group are seeking the protection of the injunction that the holdouts received, and some 25 new lawsuits have been filed by these newly litigious bondholders that have $4.7 billion in claims since June 16, according to a letter dated Nov. 6 that Argentina's lawyer, Carmine D. Boccuzzi Jr. of Cleary Gottlieb Steen & Hamilton LLP, sent to the judge who gave the injuction to the holdout group.

A group of holdout bondholders led by NML Capital Ltd., a New York hedge fund affiliated with Elliott Management Corp., and fellow hedge fund Aurelius Capital Management LP, had originally declined to participate in Argentina's 2005 and 2010 debt swaps and litigated to get paid in full, protesting Argentina's practice of paying only its restructured bondholders.

Judge Thomas P. Griesa of the U.S. District Court for the Southern District of New York in Manhattan awarded that group a so-called ratable payment injunction, which prohibits Argentina from paying restructured bondholders without also paying the holdout group, which gives teeth to their claims.

Case in point: trustee Bank of New York Mellon isn't giving the restructured bondholders the interest payments that Argentina deposits for them, for fear of violating Griesa's order. Due to that impasse, Argentina defaulted on its sovereign debt on July 30 and Oct. 30.

Henry Weisburg, a partner at Shearman & Sterling LLP who focuses on international financial disputes and follows Argentina's debt, isn't surprised that other disenchanted bondholders are now trying to hitch their claims to the injunction.

Not all non-participating bondholers are created equal, Weisburg said by phone, adding that some of them are in a stronger position to argue for the injunction than others.

Some non-participators have been awarded monetary judgments already. Others have sued seeking judgments. Some have the relief of the injunction but haven't yet been awarded judgments. Still others haven't taken any legal action.

There is a theory that the non-participating bondholders who have already been awarded monetary judgments have the strongest legal case to get the injunction, although Argentina's lawyers will dispute that, he said.

The NML-led holdout bondholder group's claims now exceed $1.6 billion, according Bocuzzi's letter, which slammed the idea that even more holdout claims could be added to the figure that Argentina would need to make payments on in order to pay its restructured bondholders and cure its defaults.

Boccuzzi said in his letter, "There can be no equitable basis for seeking to compel the Republic­ — whose reserves are approximately $28 billion and must be used for critical macroeconomic purposes--to do the impossible by paying in full its holdout debt, much of which was purchased at a deep discount in the secondary market with the aim of extracting through litigation better terms than the vast majority of the Republic's creditors who participated in the Republic's debt restructuring."

Boccuzzi's letter was in reaction to an Oct. 8 letter from NML's lawyer, Robert Cohen of Dechert LLP, which asserted, "Now that the appeals are over, and the injunctions firmly in place, the [Southern District of New York] plaintiffs strongly believe it is timely for the Court to afford the same relief to appropriate other parties."

According to Cohen's letter, the non-participating bondholders intend to consolidate their efforts into two motions: one for creditors that already have monetary judgments, and one for creditors that don't yet have judgments.

One source familiar with the situation, who asked not to be named, said on Nov. 7 that Argentina's largest creditors have made it clear that new bonds could be part of a settlement deal. Such a structure would give Argentina more time to make the payments to holdouts, easing the financial strain.

The source cited Argentina's $16 billion in recent settlement agreements related to its debt to the Paris Club and a dispute with Repsol SA as evidence that the country is willing to work out payment plans for larger sums owed to other creditors.

Dechert's Cohen said in an emailed comment Friday, "Since June, when the [U.S.] Supreme Court declined to hear its appeal, the government of Argentina has consistently said that it wants to resolve its debt dispute with all of its creditors. The motions outlined in our letter to Judge Griesa provide a constructive vehicle to reach that resolution."

According to that letter to Griesa, the NML-led holdouts intend to consolidate their efforts to get the injunction into two motions: one for creditors that already have monetary judgments, and one for creditors that don't. The purpose of this initiative is to make sure these claims are resolved "in an expeditious and orderly fashion," Cohen said.

Boccuzzi argued in his Nov. 6 letter that new parties don't have the right to be protected by the injunction due to res judicata, or claim preclusion, which prohibits continued litigation on a case that is beyond the appeals process.

He also said new parties aren't protected by the injunction according to certain provisions under the merger doctrine and the Foreign Sovereign Immunities Act.

Shearman's Weisburg believes this issue will be time-consuming to resolve, and he expects the matter to be settled sometime next year.

Meanwhile, the threat of debt acceleration looms ahead, as some hedge fund creditors who restructured their debt are considering that option.

Weisburg noted that some of Argentina's sovereign debt classes are small enough that it wouldn't be terribly difficult to amass a significant position and find like-minded holders in order to reach the 25% threshold for acceleration.

"[Acceleration] is bad for everybody. It might be mutually assured destruction; it makes it impossible for anybody to achieve anything they want," Weisburg said.

Nevertheless, he mused, if a small class of bondholders were to accelerate, would larger classes feel the need to follow suit? That remains to be seen.

"I think we're entering a new risk zone," Weisburg concluded.

These troubles stem from Argentina's 2001 default on about $93 billion in sovereign debt. Following that default, nearly 93% of creditors agreed to restructure their debt in 2005 and 2010 debt exchanges.

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